In the third episode of Practical Tax, tax attorneys Steve Moskowitz and Liz Prehn discuss the Aggregation Rules within section 199A of the new tax law. If you have multiple business or rental properties, you may be able to combine them for tax calculations. Listen to the podcast to learn more!
Speaker 1: 00:00 I was having a drink with some friends and they were talking about taxes, something about 199A, and everyone was really excited. I got to tell you I was lost, and I wondered, “Am I missing out?”
Speaker 2: 00:11 You’re listening to Practical Tax, with tax attorney Steve Moskowitz.
Steve Moskowitz: 00:15 The new tax law has given us so much. And one of the things I want to talk about right now when doing the tax returns is something called the Aggregation Rules. But before you get into them, we need to know a brief summary of what kind of benefits are we dealing with. And this is all about our favorite code section 199A. Joining us right now, colleague, associate, friend Liz Prehn. We worked together for over 20 years. Liz?
Liz Prehn: 00:40 Thanks, Steve. This tax season, we’re making a really big push to identify clients that have multiple businesses or multiple rental properties because of how these Aggregation Rules come into play and the elections that need to be made now. How are you dealing with that Steve?
Steve Moskowitz: 00:58 And the Aggregation Rules will cause you a lot of aggravation if you don’t know about them and what to do. A little tax humor which you are used to from over the years. So basically when somebody gives you something nice, what do you say? Usually people would say, “More.” And that’s what the Aggregation Rules give us. What happens is, we know with 199A — and if you’re not familiar with 199A, I strongly suggest you listen to our previous podcast. But basically it lets you, if you qualify, take 80% of your profit as being taxable instead of 100%. That’s a big deal. But there’s all kinds of limitations. What happens with these limitations, you have the election, if you have multiple businesses, to aggregate and combine them, or not. You don’t have to combine all the businesses, you can combine two or more or any number. But watch out because once you decide to make the aggregation, you have to do it for the rest of your life, except if you have a new business, then you make a decision if you’d aggregate that business or not.
Steve Moskowitz: 02:02 Let’s have an example. Suppose we have a situation where Sally has an S Corp that makes a profit of $1 million. She would have a 199A deduction of the lesser of 20% of her QBI qualified business income, essentially profit, or 50% of the W2 wages, or 25% of the W2 wages and two and a half percent of the depreciation. Let’s assume that she goes ahead and pays herself at least $400,000, she meets the rules and instead of paying profit on the million, she only pays taxes on 800,000. She goes off to a tax seminar and she meets who will become the love of her life, Bob, but he’s not a corporation. He’s a sole proprietor and he makes $1 million profit too.
Steve Moskowitz: 02:56 How much 199A does she get? Zero, because a sole proprietor can pay himself W2 wages. Poor Bob has stopped paying taxes on a million. Bob and Sally fall in love, get married, they decide to aggregate. Now Sally pays herself a salary of 800,000 out of the million profit, and now they get to deduct 20% on the both businesses. By the way, you don’t have to marry to do that. Bob could do that as well if both the businesses belong to him. But that’s just an example of the power of this. And also with real estate what’s important is a real estate business is entitled to 199A, but a real estate investment is not. So what’s the difference between an investment and a business? There’s a lot of things. Well, it’s way beyond the scope of this podcast, but one of the things the government looks at is how many properties are you managing.
Steve Moskowitz: 03:57 The more properties you’re managing, the more it appears that the activity is a business. With the Aggregation Rules you’re putting together your various rental properties. And that would help. And again, there’s lots and lots of examples here on the Aggregation Rules, but this is something where… And you don’t just sit down and figure it out for this year, you have to get out your crystal ball, put on your swami hat and decide, is this going to be good for the upcoming year? You’d actually want to go ahead and do some calculations, some estimate. How do I think my businesses are going in the future? Because, remember once you make this election, you can’t change it. So again, do we want to do this or not? And you do your calculations based on this year and your best guesses on upcoming years. Lots of decisions to make. And also, like everything else, there’s rules here that you have to go ahead and follow. But if you know the rules, then you go ahead and qualify for aggregation. And as we know from some of our clients is to save this tremendous money.
Liz Prehn: 05:02 Steve, I think just in our practice… I know in our practice and tax practices around the country, a lot of tax extensions are being filed for the March deadline and the April deadline because there’s a lot of decisions that need to be made. There’s a lot of back records that need to be looked at and so people can really benefit if they can.
Steve Moskowitz: 05:22 That’s right. Again, you have the ability to pay tax on only 80% of your profit instead of 100%, but you have to watch out for all these limitations, know about them. The job of a tax attorney is to get you around as many of them as possible and have these benefits. Oftentimes by making a very small change in your business, you can have a huge deduction that otherwise you won’t get.